Rules of origin are the criteria needed to determine the
national source of a product. Their importance is derived from the fact that duties and
restrictions in several cases depend upon the source of imports.

There is wide variation in the practice of governments with regard to the rules of origin.
While the requirement of substantial transformation is universally recognized, some
governments apply the criterion of change of tariff classification, others the ad
valorem percentage criterion and yet others the criterion of manufacturing or
processing operation. In a globalizing world it has become even more important that a
degree of harmonization is achieved in these practices of Members in implementing such a
requirement.

GATT has no specific rules governing the determination of the
country of origin of goods in international commerce. Each contracting party was free to
determine its own origin rules, and could even maintain several different rules of origin
depending on the purpose of the particular regulation. The draftsmen of the General
Agreement stated that the rules of origin should be left:

...within the province of each importing country to determine, in accordance with
the provisions of its law, for the purpose of applying the most-favoured-nation provisions
(and for other GATT purposes), whether goods do in fact originate in a particular
country.

Article VIII:1(c) of the General Agreement, dealing with fees and formalities
connected with importation and exportation, states that the contracting parties also
recognize the need for minimizing the incidence and complexity of import and export
formalities and for decreasing and simplifying import and export documentation
requirements and the Interpretative Note 2 to this Article states that it would
be consistent if, on the importation of products from the territory of a contracting
party into the territory of another contracting party, the production of certificates of
origin should only be required to the extent that is strictly indispensable.

It is accepted by all countries that harmonization of rules of
origin i.e., the definition of rules of origin that will be applied by all countries and
that will be the same whatever the purpose for which they are applied - would
facilitate the flow of international trade. In fact, misuse of rules of origin may
transform them into a trade policy instrument per se instead of just acting as a
device to support a trade policy instrument. Given the variety of rules of origin,
however, such harmonization is a complex exercise.

In 1981, the GATT Secretariat prepared a note on rules of origin and, in
November 1982, Ministers agreed to study the rules of origin used by GATT Contracting
Parties. Not much more work was done on rules of origin until well into the Uruguay Round
negotiations. In the late 1980s developments in three important areas served to focus
more attention on the problems posed by rules of origin:

Increased number of preferential trading arrangements

First, an increased use of preferential trading arrangements,
including regional arrangements, with their various rules of origin;

Increase in the number of origin disputes

Second, an increased number of origin disputes growing out of
quota arrangements such as the Multifibre Arrangement and the voluntary steel
export restraints; and

Increased use of anti-dumping laws

Lastly, an increased use of anti-dumping laws, and subsequent
claims of circumvention of anti-dumping duties through the use of third country
facilities.

The Agreement on Rules of Origin aims at harmonization of
non-preferential rules of origin, and to ensure that such rules do not themselves create
unnecessary obstacles to trade. The Agreement sets out a work programme for the
harmonization of rules of origin to be undertaken after the entry into force of the World
Trade Organization (WTO), in conjunction with the World Customs Organization (WCO).

General principles

Until the completion of the three-year harmonization work
programme, Members are expected to ensure that their rules or origin are transparent; that
they are administered in a consistent, uniform, impartial and reasonable manner; and that
they are based on a positive standard.

Article 1 of the Agreement defines rules of origin as those
laws, regulations and administrative determinations of general application applied to
determine the country of origin of goods except those related to the granting of tariff
preferences. Thus, the Agreement covers only rules of origin used in non-preferential
commercial policy instruments, such as MFN treatment, anti-dumping and countervailing
duties, safeguard measures, origin marking requirements and any discriminatory
quantitative restrictions or tariff quotas, as well as those used for trade statistics and
government procurement. It is, however, provided that the determinations made for purposes
of defining domestic industry or like products of domestic industry shall not
be affected by the Agreement.

The Agreement establishes a Committee on Rules of Origin within
the framework of the WTO, open to all WTO Members. It is to meet at least once a year and
is to review the implementation and operation of the Agreements (Article 4:1).

WCO Technical Committee

A Technical Committee on Rules of Origin is created under the
auspices of the World Customs Organization (formerly the Customs Cooperation Council). Its
main functions are (a) to carry out the harmonization work; and (b) to deal with any
matter concerning technical problems related to rules of origin. It is to meet at least
once a year. Membership is open to all WTO Members; other WCO members and the WTO
Secretariat may attend as observers (Article 4:2 and Annex I).

Article 9:2 provided that the HWP be completed within three
years of initiation. Its agreed deadline was July 1998. While substantial progress
was made in that time in the implementation of the HWP, it could not be completed due to
the complexity of issues. In July 1998 the General Council approved a decision
whereby Members have committed themselves to make their best endeavours to complete the
Programme by a new target date, November 1999.

The work is being conducted both in the WTO Committee on Rules of Origin (CRO) in Geneva
and in the WCO Technical Committee (TCRO) in Brussels. The TCRO is to work, on a
product-sector basis of the HS nomenclature, on the following matters:

Definitions of goods being wholly obtained

To provide harmonized definitions of the goods that are to be
considered as being wholly obtained in one country, and of minimal operations or processes
that do not by themselves confer origin to a good;

Last substantial transformation

Change of tariff heading

To elaborate, on the bases of the criteria of substantial
transformation, the use of the change of tariff classification when developing harmonized
rules of origin for particular products or sectors, including the minimum change within
the nomenclature that meets this criterion.

Supplementary criteria

To elaborate supplementary criteria, on the basis of the
criterion of substantial transformation, in a manner supplementary or exclusive of other
requirements, such as ad valorem percentages (with the indication of its method of
calculation) or processing operations (with the precise specification of the operation).

The CRO considers the input of the TCRO with the aim of endorsing the TCRO's
interpretations and opinions, and, if necessary, refining or elaborating on the work of
the TCRO and/or developing new approaches. Upon completion of all the work in the TCRO,
the CRO is to consider the results in terms of their overall coherence (Article 9:3).

The CRO and the TCRO have established an overall architectural
design within which the harmonization work programme is to be finalized. This encompasses

 general rules, laid down in eight Articles provisionally entitled: Scope of
Application; the Harmonized System; Definitions; Determination of Origin; Residual Rules
of Origin; Minimal Operations or Processes; Special Provisions; and De Minimis;

The results of the harmonization programme are to be approved by
the Ministerial Conference and will then become an annex to the Agreement. When doing
this, the Ministerial Conference is also to give consideration to arrangements for the
settlement of disputes relating to customs classification and to establish a time-frame
for the entry into force of the new annex.

During the transition period (i.e. until the entry into force of
the new harmonized rules) Members are required to ensure that:

(a) rules of origin, including the specifications related to the substantial
transformation test, are clearly defined;

(b) rules of origin are not used as a trade policy instrument;

(c) rules of origin do not themselves create restrictive, distorting or disruptive effects
on international trade and do not require the fulfilment of conditions not related to
manufacturing or processing of the product in question;

(d) rules of origin applied to trade are not more stringent than those applied to
determine whether a good is domestic, and do not discriminate between Members (the GATT
MFN principle). However, with respect to rules of origin applied for government
procurement, Members are not be obliged to assume additional obligations other than those
already assumed under the GATT 1994 (the national treatment exception for government
procurement contained in GATT Article III:8).

(e) rules of origin are administered in a consistent, uniform, impartial and reasonable
manner;

(f) rules of origin are based on a positive standard. Negative standards are permissible
either as part of a clarification of a positive standard or in individual cases where a
positive determination or origin is not necessary;

(g) rules of origin are published promptly;

(h) upon request, assessments of origin are issued as soon as possible but no later than
150 days after such request, they are to be made publicly available; confidential
information is not to be disclosed except if required in the context of judicial
proceedings. Assessments of origin remain valid for three years provided the facts and
conditions remain comparable, unless a decision contrary to such assessment is made in a
review referred to in (j). This advance information on origin is considered as a great
innovation of the Agreement;

(i) new rules of origin or modifications thereof do not apply retroactively;

(j) any administrative action in relation to the determination of origin is reviewable
promptly by judicial, arbitral or administrative tribunals or procedures independent of
the authority issuing the determination; such findings can modify or even reverse the
determination;

(k) confidential information is not disclosed without the specific permission of the
person providing such information, except to the extent that this may be required in the
context of judicial proceedings.

As from the conclusion of the HWP, non-preferential rules of
origin will be harmonized and Members will be bound to apply only one rule of origin for
all purposes covered by Article 1. The principles contained in (d) through (k) above
will continue to apply  i.e. transparency, non-discrimination (also including rules
of origin applied for government procurement), and the possibility of reviewing any
administrative actions concerning determination of origin (Article 3).

Annex II of the Agreement on Rules of Origin provides that
the Agreement's general principles and requirements for non-preferential rules of origin
in regard to transparency, positive standards, administrative assessments, judicial
review, non-retroactivity of changes and confidentiality shall apply also to preferential
rules of origin.

Article 5:1 of the Agreement requires each Member to
provide to the Secretariat, within 90 days after the date of entry into force of the WTO
Agreement for it, its currently applicable rules of origin, judicial decisions and
administrative rulings of general application relating to rules of origin. The Secretariat
circulates to all Members lists of the information received and available to them.

At its meeting of 4 April 1995, the Committee agreed that any notifications made
in a language other than a WTO working language should be accompanied by a summary in a
WTO working language (G/RO/1).

Paragraph 4 of Annex II of the Agreement on Rules of
Origin provides that Members shall provide to the Secretariat promptly their preferential
rules of origin, including a listing of the preferential arrangements to which they apply,
judicial decisions, and administrative rulings of general application relating to their
preferential rules of origin as soon as possible to the Secretariat. The Secretariat
circulates lists of the information received and available to Members.

At its meeting of 4 April 1995, the Committee agreed that any notification made
in a language other than a WTO working language, should be accompanied by a summary in a
WTO working language (G/RO/1).